We own a very marketable and profitable rental house in our HCOL area, about 15 minutes from our own house, in a neighborhood that has appreciated substantially and we reasonably expect to do so for the foreseeable future. We have two little kids, and my wife's parents, who currently live about halfway across the country, have previously discussed moving to our city, at least part time, and those discussions seem to have accelerated in light of COVID-19 and travel having become that much harder.

You can see where this is going. Our current tenants have told us they're planning to leave in two months, and our rental house would be pretty perfect for our in-laws. We have a good relationship, although like most people, having them super close might be hard. 15 minutes away is probably good. My father-in-law is extremely handy (he is a now-retired general contractor) and I could count on him to handle basically anything that came up with the house, which would be a relief to me as my job has been very demanding and isn't going to get easier anytime soon, and did I mention the two young children whom we are now caring for full time in addition to our demanding jobs? The income flow from the property is not a big deal for us as we each have stable six-figure incomes, but I would need the PITI covered to avoid blowing a hole in our budget.

So, I have two questions:

(1) Would you rent your house to your in-laws in these circumstances?

(2) What would you charge? I am hesitant to charge them full market rent, but also need something to cover fixed expenses. And I understand there are potential tax consequences if I deviate too far (perhaps more than 10 percent) from the going rate.

What do your in-laws want to do? Do they want to pay you rent all year if they are only there part-time?

I should've been clearer about this. Due to COVID-19, their thinking has evolved to a situation where they will be primarily based here but will travel to the extent possible depending on the future course of the pandemic. They're in fine (not amazing, but fine) shape financially and I think they would pay whatever we asked. I would be at least somewhat uncomfortable charging them full market value, although I would get over that if I could explain that there was a compelling (e.g. tax-related) reason that was necessary.

are there potential tax consequences if you fail to charge market rent? I would assume as long as the difference is less than the yearly exemption $15,000 per person, there wouldn't be an issue. Even if it were more than that, as long as it's not more than the lifetime exemption ($11.58 million), what's the problem?

"May you live as long as you want and never want as long as you live" -- Irish Blessing |
"Invest we must" -- Jack Bogle

Depending on family dynamics, now and going forward, and in the future:

1. Yes. Absolutely.
2. It depends. And, can be great or get really really messy.

Questions:
1 Pay rent year round?
2 Cover residence expenses year round (at least this, including insurance, prop tax, etc).?
3 What would they and you do if it came time to sell the property?
4 Expectations? There's and yours?
5 If the inlaws decided to buy the property, would they have an expectation of value, or rent paid to date credited, or what?
6 What happens, hope not, if there is a divorce from spouse?
7 Do you have an exit plan?

What do your in-laws want to do? Do they want to pay you rent all year if they are only there part-time?

I should've been clearer about this. Due to COVID-19, their thinking has evolved to a situation where they will be primarily based here but will travel to the extent possible depending on the future course of the pandemic. They're in fine (not amazing, but fine) shape financially and I think they would pay whatever we asked. I would be at least somewhat uncomfortable charging them full market value, although I would get over that if I could explain that there was a compelling (e.g. tax-related) reason that was necessary.

If the family dynamics are very good, having your in-laws closer to you benefits you and them especially as they age.

You can let in-laws know the market rental price for the house. They can decide if that fits their budget (and, if not, whether the needed rent reduction works for you). During their initial stay they can look at other properties too. Perhaps they want something smaller, in a senior friendly complex or one floor living as they age.

Since you own a nearby rental and your tenants are moving out, it gives you an opportunity to test out the arrangement. Are they able to move out to your area in the next couple months?

Last edited by HomeStretch on Thu May 21, 2020 8:04 pm, edited 1 time in total.

Depending on family dynamics, now and going forward, and in the future:

1. Yes. Absolutely.
2. It depends. And, can be great or get really really messy.

Questions:
1 Pay rent year round?
2 Cover residence expenses year round (at least this, including insurance, prop tax, etc).?
3 What would they and you do if it came time to sell the property?
4 Expectations? There's and yours?
5 If the inlaws decided to buy the property, would they have an expectation of value, or rent paid to date credited, or what?
6 What happens, hope not, if there is a divorce from spouse?
7 Do you have an exit plan?

j

Often the best advice is questions and not answers, and I think this qualifies. Thank you.

and did I mention the two young children whom we are now caring for full time in addition to our demanding jobs?

Is the implication here that if your in-laws lived close by that they would help you with this?

A fair inference but not the intended one. I only meant to say that we happen to be in a particular two-year stretch where our other life demands are especially high, so if someone offered me a break from landlording I would be especially inclined to take it, and I could reasonably expect the in-laws to just deal with anything that came up with the house. It is true that our kids will benefit from having their grandparents close, and vice versa, especially if travel will be harder for the near future. So insofar as this facilitates that I think there's a real benefit. But not counting on them as caregivers.

Separately, I appreciate that the standard Boglehead advice (sell the house) hasn't been raised. It's not an option we're considering at the moment based on our own calculus of the value of holding this property for appreciation. For now the question is "rent to in-laws or rent to someone else."

I rented a place out to a friend, it was always going to be a short term deal, I thought it was pretty fool proof and charged well below market rate. He didn't end up being such a great friend when he left. Just an extremely high maintenance tenant and never felt he at all recognized the favor. He was paying about 40% less than what I could have gotten from a stranger.

It's just an easy way to sour what could be a good relationship. You'll likely be trapped with a tenant that pays below market rate for life and if you decide to sell before they are ever ready to leave, it will be a family rift. If they ever have a financial setback, be prepared to forgo rent until they get it figured out. And obviously, you can never, never evict them.

are there potential tax consequences if you fail to charge market rent? I would assume as long as the difference is less than the yearly exemption $15,000 per person, there wouldn't be an issue. Even if it were more than that, as long as it's not more than the lifetime exemption ($11.58 million), what's the problem?

The potential tax problem is this: if you rent a property to relatives at below market value, every day of such rental is considered a day of personal use by the owner, making the "rental property" subject to the vacation home deduction rules. No rental loss is allowed and deductible rental expenses would essentially be limited to mortgage interest and real estate taxes. See Code Sec. 280A.

are there potential tax consequences if you fail to charge market rent? I would assume as long as the difference is less than the yearly exemption $15,000 per person, there wouldn't be an issue. Even if it were more than that, as long as it's not more than the lifetime exemption ($11.58 million), what's the problem?

The potential tax problem is this: if you rent a property to relatives at below market value, every day of such rental is considered a day of personal use by the owner, making the "rental property" subject to the vacation home deduction rules. No rental loss is allowed and deductible rental expenses would essentially be limited to mortgage interest and real estate taxes. See Code Sec. 280A.

so could a way around it be:
1. they first pay you full market rent
2. you gift them a certain amount of money per year

if they're actually paying you full market rent, I don't see how this could be a problem.

"May you live as long as you want and never want as long as you live" -- Irish Blessing |
"Invest we must" -- Jack Bogle

are there potential tax consequences if you fail to charge market rent? I would assume as long as the difference is less than the yearly exemption $15,000 per person, there wouldn't be an issue. Even if it were more than that, as long as it's not more than the lifetime exemption ($11.58 million), what's the problem?

The potential tax problem is this: if you rent a property to relatives at below market value, every day of such rental is considered a day of personal use by the owner, making the "rental property" subject to the vacation home deduction rules. No rental loss is allowed and deductible rental expenses would essentially be limited to mortgage interest and real estate taxes. See Code Sec. 280A.

are there potential tax consequences if you fail to charge market rent? I would assume as long as the difference is less than the yearly exemption $15,000 per person, there wouldn't be an issue. Even if it were more than that, as long as it's not more than the lifetime exemption ($11.58 million), what's the problem?

The potential tax problem is this: if you rent a property to relatives at below market value, every day of such rental is considered a day of personal use by the owner, making the "rental property" subject to the vacation home deduction rules. No rental loss is allowed and deductible rental expenses would essentially be limited to mortgage interest and real estate taxes. See Code Sec. 280A.

so could a way around it be:
1. they first pay you full market rent
2. you gift them a certain amount of money per year

if they're actually paying you full market rent, I don't see how this could be a problem.

Under audit , the IRS could quite properly deem the so-called "gift" a disguised rental reduction to avoid the provisions of Sec 280A. I would advise against it.

are there potential tax consequences if you fail to charge market rent? I would assume as long as the difference is less than the yearly exemption $15,000 per person, there wouldn't be an issue. Even if it were more than that, as long as it's not more than the lifetime exemption ($11.58 million), what's the problem?

The potential tax problem is this: if you rent a property to relatives at below market value, every day of such rental is considered a day of personal use by the owner, making the "rental property" subject to the vacation home deduction rules. No rental loss is allowed and deductible rental expenses would essentially be limited to mortgage interest and real estate taxes. See Code Sec. 280A.

Is this still the case if you let them live in the house for free?

If they live there for free, it is a personal residence, not a rental property - no rental income and no rental expenses.

and did I mention the two young children whom we are now caring for full time in addition to our demanding jobs?

Is the implication here that if your in-laws lived close by that they would help you with this?

A fair inference but not the intended one. I only meant to say that we happen to be in a particular two-year stretch where our other life demands are especially high, so if someone offered me a break from landlording I would be especially inclined to take it, and I could reasonably expect the in-laws to just deal with anything that came up with the house.

That makes sense. Since I don't know the people involved, I will withhold comment. What might work great in some situations could be a nightmare in others. Personally, I avoid all such situations with family or friends.

I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

I have rented, “or housed”, family, relatives, and “friends”, in my rental properties over the many decades. Often, it was taken for granted that I didn’t need full rent income “since I was a landlord” and seemed to own a lot of properties. Often, folks were appreciative and grateful when moving in, not so when leaving or asked to leave. Sometimes, I rented to one relative or family member and ended up with more “guests” and “friends”.

Sometimes we do things for family because, to us, it is the “right thing to do” regardless of risk or financial outcome....all the while knowing that in the big picture of things, if we refused, we would not be Substantively blamed or personally faulted for saying no.

Actionably: there are financial decisions, family decisions, and life decisions. The crux I’d determining which one.

If you do rent to them it would be good to discuss all expectations from both parties to assure a continued good relationship.

I recall a forum thread years ago where a poster had rented to his in-laws with the condition that grandparents would also perform so many hours of babysitting. You can see where that went south. The situation devolved into a bad business relationship which soured family ties.

Our rental agreements are based on business agreements. We rent at the rate that is competitive for the area + includes for normal rental house expenses.

We've had a friend who was somewhat strapped financially who we rented to - we offered him a slightly longer term lease with no rent increase to help him get over the 'hump.' This was an exception and we were happy to make this deal since he was a nit-picky type person who treated our house like it was his own (with great care) - no real maintenance issues when he left.

If this rental house has appreciated like you say, then now is the time to sell it. You say you could use a break from landlording (as this is far from "passive income"...my words). So take that easy break. Sell it. Use the money to do whatever you feel is best. Pay down your own mortgage, invest, put in 529 money, up your taxable account.

Is this the only rental house in your entire area? I sorta doubt it. If your in laws want to move closer to you, all they have to do is find a rental and move. It doesn't have to be to your house. It might be to a smaller apartment that's easier to keep clean and much less bother.

I only meant to say that we happen to be in a particular two-year stretch where our other life demands are especially high, so if someone offered me a break from landlording I would be especially inclined to take it, and I could reasonably expect the in-laws to just deal with anything that came up with the house. It is true that our kids will benefit from having their grandparents close, and vice versa, especially if travel will be harder for the near future. So insofar as this facilitates that I think there's a real benefit. But not counting on them as caregivers.

I'm a landlord with great tenants and am also far past the young-kids-dual-career stage of life. It's still a PITA, and in your situation I'd say go for it by renting it to your in-laws and charging them the sum that will cover your fixed expenses. If you need more for tax or regulatory reasons, set it at the minimum level necessary to achieve.

This will let you hold on to a rental property in a HCOL area with a tenant you completely trust who will also do repairs and upkeep. It also pretty much erases the hassles of being a landlord. During what's probably the busiest family stage of your lives you have now lifted a major burden of time and aggravation for yourself and your wife as well as facilitating family connections and time together for everyone.

If you do rent to them it would be good to discuss all expectations from both parties to assure a continued good relationship.

I recall a forum thread years ago where a poster had rented to his in-laws with the condition that grandparents would also perform so many hours of babysitting. You can see where that went south. The situation devolved into a bad business relationship which soured family ties.

The same thing happened to me. We rented to my parents in exchange for babysitting. Long story short, they reneged on the deal. I'm not going to sell the home and kick my parents out on the street. I did get them to pay rent, though, so there is no soured relationships.

If I could do it over again, I would still have done it as the alternatives would be worse for my parents. But I am really unhappy owning my parents home. I charged my parents market rate but after 5 years of no rent increases, they are now getting an incredible deal in Bay Area, CA. So the answer is no, I would not do it if I were you. If you do rent to them, rent market rate knowing full well that you might never raise their rent.

If my parents suddenly say they can't pay rent. We will not kick them out or sell the home. We will just grumble and bear it. We're in the fortunate situation to be able to pay for both mortgages.